Rayonier Inc (RYN) 2005 Q4 法說會逐字稿

Good day, everyone, and welcome to the Rayonier fourth quarter earnings release conference call. Today's call is being recorded by Rayonier and is copyrighted material. It cannot be recorded or rebroadcast without our express permission. Your participation on this call constitutes implied consent. Please hang up now if you do not consent to being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to senior vice president and chief financial officer, Mr. Gerald Pollack. Please go ahead, sir.

Thank you and good afternoon. I'd like to once again welcome everybody to Rayonier's investor teleconference, this time covering our earnings for the fourth quarter and full year of 2005. Our earnings statements were released this morning and supplemental materials distributed soon thereafter. Both are available on our website at Rayonier.com.

With us today is Lee Nutter, chairman, president, and CEO; Hans Vanden Noort, senior vice president and chief accounting officer; Carl Kraus, senior vice president in finance; and Tim Brannon, senior vice president, forest resources wood products. Tim will assist Lee in covering several markets and operation reports, and Hans will cover the financial presentation.

As usual, we include forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act. Our earnings release and other recent press releases list some of these factors, which may cause actual results to differ materially from the forward-looking statements we may make. They are also repeated on page 2 of our supplemental material. Please familiarize yourselves with them. This conference is also being webcast and can be accessed through our website.

With that, let's start the program with opening comments from Lee Nutter. Lee?

Thank you, Gerry. Before Hans takes us through the financials, I will make a few overall comments here. Following Hans, Tim Brannon, our senior vice president of forest resources will review the markets and operations of our timber business through the REIT. Afterwards, I will update you on real estate and the Performance Fibers businesses, and then Tim will come back for just a quick comment on the lumber business.

Across the board, 2005 was a good year for us and all of our businesses. We paid dividends of $129 million, invested $90 million in capital expenditures and our businesses, and ended the year with cash and cash equivalents on our balance sheet of $146 million.

Our earnings reflect a very favorable business mix, which translates into our strong and consistent cash flow. As we have indicated before, our strategy remains to grow the REIT, build TerraPointe, and strengthen Performance Fibers.

On the timberland side, we monetized our New Zealand timberlands and simultaneously expanded our presence there through a REIT-qualifying joint venture in which we hold a 49% position. We feel the monies realized from the sale will better be deployed in the U.S. for timberland acquisitions at the right time.

TerraPointe is the real estate subsidiary we established last year to capture the full value of our extensive higher and better use real estate holdings, which are located primarily down here in the Southeast.

In Performance Fibers, we continue to strengthen our position as the world's leading producer of high value and high purity cellulose specialties. Last year to further sharpen our strategic focus on these three core businesses, timberland, the REIT, TerraPointe, and Performance Fibers, we exited non-core assets by selling the New Zealand MDF business and our U.S.-engineered absorbents material plant.

Coming into 2006, we are where we ought to be in the structure in the economic positions of those core businesses. We will opportunistically expand our timber business and thus the REIT, build up TerraPointe to unlock the greater value there, and the strengthen Performance Fibers with a prudent, ongoing capital investment program. Performance Fibers is a very good business and a significant source of cash and earnings for this company.

Hans?

Thanks, Lee. Before we do our normal comparison of this quarter's earnings to previous periods, let's begin with page 3 of the supplemental material where we itemize various special items that we feel should be taken into account when analyzing this quarter's and full year's earnings. These are items, which we believe should be adjusted out of reported earnings to come to a more meaningful comparative result.

At the top half of the page, we can see the fourth quarter of 2005 reported earnings of $0.73 per share. We back out the gain on sale of our New Zealand timber assets to the joint venture and make a slight adjustment -- or, rather, reflect a slight adjustment to our tax benefit on our repatriated earnings to come to our fourth quarter 2005 pro forma earnings of $0.34 per share, which we will use in our subsequent analyses.

The impact of these and other items on the full-year results and for prior reported results for 2004 are also shown. In addition to the New Zealand gain on sale, other 2005 special items included a charge to net income for discontinuing and selling our MDF facility in New Zealand, tax and interest benefits associated with various IRS settlements for audit years 1994 through 2002, a tax benefit on repatriating undistributed foreign earnings under the 2004 American Jobs Creation Act, and the result of a favorable arbitration award in a dispute with our former parent company related to insurance recoveries. Adjusting for these special items results in a pro forma $1.57 per share for the full year.

Let's turn to chart 4 for the financial highlights. On the top of the page, we reflect this quarter's $316 million in sales, which were approximately $16 million over the third quarter with improved revenue from both timber and Performance Fibers contributing. Lee and Tim, as is typical, will go into the key drivers behind that revenue movement.

Revenue is also $31 million above the prior year with all segments contributing except for our trading operations.

Operating income of $36 million was approximately $15 million below third quarter 2005, as significantly higher costs in Performance Fibers, lower real estate sales more than offset increased U.S. timber volumes. We'll go into more detail on individual segment variances in the following chart.

Income from continuing operations and net income of $56 million for the quarter were below the third quarter. Items between operating income and net income contributing to this additional unfavorable variance include the third quarter special items affecting interest and taxes noted on the last call and included on chart 20. These exceeded the gain on sale of the New Zealand timber assets in the fourth quarter. Compared to fourth quarter 2004, operating income was $10 million favorable due primarily to higher prices in all business units and improved real estate sales. Income from continuing operations and net income were substantially better due to the gain on sales of New Zealand timber assets in addition to the increased operating income.

On the bottom half of chart 4, we provide an outline of cash resources and liquidity. Although cash provided by operating activities for the year of $263 million was below last year's amount, adjusted EBITDA of $360 million was $29 million above the prior year's, while cash available for distribution of $167 million was comparable to 2004.

Cash flow during the quarter continued to be strong, debt was reduced by $31 million from the September 30th balance, and $100 million from the 204 ending balance. Sixty-five million of cash generated from the fourth quarter sale of New Zealand timberlands and $40 million from the sale of our MDF business in the third quarter were key contributors to our debt reduction.

Debt to capital improved to 38.7% from year-end's 45.3% and, as Lee noted, we ended the quarter with approximately $146 million in cash.

Let's turn to chart 5 now for the variance analysis. On chart 5, we show a comparison of third quarter to fourth quarter trends. We begin with $0.46 in pro forma earnings per share from the third quarter and come down to our fourth quarter pro forma results of $0.34 per share. As we run through the operating variances, you can see $7 million of operating income improvement in the timber group, primarily due to volume. The third quarter typically has seasonally low volume in our Northwest region. In the Southeast, we also benefited from higher prices and increased income from timber-related activities. Somewhat offsetting these improvements was a loss on our equity investment in the initial quarter of the New Zealand joint venture operations. This reflects startup costs and lower volume as the joint venture organization took shape.

Our real estate results were about $6 million below the third quarter due to termination of a transaction in Georgia, as we mentioned in our release earlier this month. However, the realized prices per acre on both rural and development sales were well above the third quarter.

Continuing down the page, you can see a $9 million decline this quarter for our Performance Fibers business unit from the third quarter resulting from cost increases primarily in wood fiber and energy and mix-driven price declines in both our cellulose specialties and absorbed materials product lines.

In wood products, which now solely reflects our lumber business, the results were also below the third quarter primarily due to lower prices. In corporate and other, the negative variance includes a $3 million charge this quarter to increase the disposition reserves for the closed Port Angeles, Washington, mill.

Let's move on to chart 6 to briefly review the year-over-year variances. On this chart we start with fourth quarter 2004 at a pro forma $0.18 per share basis for income from continuing operations and work down to the fourth quarter 2005 result of $0.34 per share. Here we can see again the timber group's significant year-over-year improvement resulting from higher prices primarily in the Northwest. As mentioned earlier, we had strong real estate price-per-acre performance this quarter, which resulted in a $4 million pretax improvement over last year's fourth quarter despite less acreage sold.

Moving down the chart, Performance Fibers pricing on both sales of specialties and absorbent materials was favorable but was offset by higher wood, chemical, and energy costs. Other operations results were comparable.

The $3 million Port Angeles charge is reflected in the corporate and other variance. In total, our fourth quarter operating income was $10 million above the prior year. There's a $5 million favorability in the interest expense/other line item, and that primarily reflects the gain on the sale of [unintelligible] manufacturing facility and increased interest income.

On a full-year basis, the same trends just noted were basically in place resulting in improvement of $1.44 per share to $1.57 per share. One significant exception was in our real estate segment. With the creation of TerraPointe to focus more on long-term development opportunities, we reduced our untitled real estate sales, which is cleared on the $12 million operating income shortfall compared to 2004.

On the tax line, you can see the absence of a significant like-kind-exchange benefit we had last year, which negatively impacted this comparison by $8 million. However, this was partially offset by higher timber income, which resulted in an improved REIT versus TRS mix.

Let's now review our cash flow as it relates to cash available for distribution on chart 7. On this chart, we begin with adjusted EBITDA, which includes a noncash cost basis for land sold and work our way down to cash available for distribution. This year's adjusted EBITDA of $360 million represents a $29 million increase over prior year, driven primarily by improved prices net of somewhat higher costs, as noted earlier. The suggested EBITDA has been reduced for capital spending an interest expense, both of which are at levels comparable to the prior year. The income tax benefit and accrued deferred income tax lines reflect amounts that have run through our P&L as well as the net balance sheet changes due to payments. The significant special items noted earlier were key components of these changes.

The working capital and other balance sheet change line reflects increased working capital needs including disposition spending of about $9 million as well as pension contributions that were $15 million above pension expense of $12 million.

The other significant item compared to prior year was the impact of like-kind exchanges in our CAD calculation. For CAD purposes, we considered the like-kind exchange benefits to represent investing activities versus operating activities, since they are realizable only through reinvestment. Therefore, we reduce adjusted EBITDA to reflect taxes that would have been paid on real estate sales had the LPE benefits not occurred. While this only had a $3 million impact on the current-year CAD calculation, last year's calculation was impacted by $30 million.

Overall, cash available for distribution of $167 million is comparable to last year. CAD per share at $2.15 still well exceeded our 2005 dividend of $1.71 per share.

With that, let me turn the conference over to Tim to begin the markets and operations report.

Thank you, Hans. Let me briefly review the results for the fourth quarter and then generally discuss our market expectations for first quarter 2006.

In the Northwest, on page 9, our harvest volume in the fourth quarter rebounded nicely after our traditionally slow third quarter, as lumber markets remained solid, fueled by strong housing starts. Prices were also solid, remaining at the significantly improved levels achieved in the first and second quarters of 2005. Although current timber demand is strong, in part, due to wet weather and poor logging conditions, so far, in January, we are seeing some slight price weakness going into the first quarter of 2006 and expect prices to be flat to slightly down for the year, while volume for the year is expected to remain steady.

Moving on to the Southeast on page 10, note that volume and price demonstrated a lift from the third quarter into the fourth quarter. Demand for pine, saw timber, and pulp wood were both strong as consuming mills in our area ran well, and customers showed a preference for our sites that tend to be more accessible in wet weather. Pine prices are expected to rise modestly in the first quarter and volume should approach the levels seen in the first quarter of 2005. Volume for the year is expected to be generally comparable to 2005.

Now I'll turn the presentation over to Lee to comment on TerraPointe and Performance Fibers.

Thanks, Tim. I'll just make a few comments here about fourth quarter, our outlook for the first quarter, and, to some extent, for the year. In our real estate business, as Hans mentioned, there is always uncertainty in the timing of sales and thus the variations, period to period. The impact is obviously more pronounced when selling in large blocks versus the shift. We expect to see, over time, as TerraPointe moves from selling wholesale, as we like to think about it and more to a retail sales program.

As we noted in our third quarter call, we have separated the TerraPointe business basically by geography and markets into two groups -- development properties and rural properties. Development properties are represented primarily by the 11 coastal counties between Savannah, Georgia, and Daytona Beach, Florida. Rural properties essentially represent the balance of our ownership in the Southeast.

The exceptionally high price per acre you see here on page 11, in the fourth quarter, is due to the mix -- commercial property and some higher-value residential property in Georgia.

In January, as we said in our pre-announcement where it indicated TerraPointe sale of 570,000 acres had not closed as forecast. This property, although still there is an entitled property with very high joint venture opportunity for TerraPointe. In looking at what we have in the pipeline, so to speak, we expect first quarter sales to be below fourth quarter. However, for the year, we expect operating income from TerraPointe to be above that of 2005.

Overall, the market remains strong in both our development and our rural sales program, and we have entered into joint venture discussions with development partners considering several different tracks.

Rural sales, on page 12, we're off the run rate primarily due to the absence of any large transactions. The average price per acre for the quarter improved mainly due to some rural sales in Florida where markets are generally stronger than Georgia and Alabama.

Performance Fibers and cellulose specialties on page 13 -- fourth quarter was blessed with long order files and contracts and cursed with high raw materials costs and some unusual short-term operating problems at the Jesup mill.

For the year, despite the large cost increases in raw material, especially oil, we had operating income of $53 million versus $47 million in 2004, and adjusted EBITDA of $130 million in 2005 versus $124 million in 2004. This business remains a very meaningful contributor to overall earnings and cash flow.

Cellulose specialties -- demand, especially for acetate, is very strong, and we expect that to continue for at least the next 12 months. On page 13 you can see the steady pricing and sale of specialties, whereas, as we noted last quarter, our 2006 cellulose specialty prices will be about 7% above the 2005 averages.

To mitigate the impact of escalating energy costs, Performance Fibers has implemented an energy surcharge on the majority of our cellulose specialties business and the entirety of our acetate volume, which is a minimum of 3% in price above those of 2005, and that's in addition to the previously mentioned 7% standard price increase.

In fluff pulp, which represents about 24% of our Performance Fibers revenue, prices eased slightly in the fourth quarter, and we are anticipating some modest softness in the first quarter. Fluff pulp has become more or less a commodity product unless we see prices moving, to some extent, to the same level with -- at the same levels as paper pulp.

For the year, on page 14, you see the increased total production by almost 5%, and cellulose specialties up by nearly 8%. Obviously, we will continue pushing to further enrich that mix.

On the energy front, in 2006, we expect to see a meaningful reduction in our use of gas and oil. This year it will come from relatively small capital investments at the Jesup mill, and in early 2007, the completion and startup of a new wood waste-fired power boiler at the Fernandina mill. This investment should reduce our annual oil consumption there by 200,000 barrels a year, or 25% of Performance Fiber's total oil consumption. The combined projects at the two mills when completed should reduce our oil consumption by about 38%.

With that, let me go back to Tim for some comments on our lumber business.

Thanks, Lee. Southeast lumber data, on page 15, reflect prices that declined in the fourth quarter but our volume remained steady. In the first quarter, we expect volume to ease slightly to our more historical first-quarter levels but prices to remain relatively steady. As the year progresses, our volumes are expected to be up modestly as a result of de-bottlenecking projects while our prices are expected to ease with the projected softness in housing starts. I'll now turn the presentation back to Hans.

Thanks, Tim. With this chart number 16, we typically close the formal part of our presentation and give some guidance as to upcoming earning trends. At this point, we are focusing primarily on the first quarter and full year 2006.

Based on current market conditions, we expect the first quarter earnings to be below fourth quarter pro forma earnings of $0.34 a share and below first quarter 2005 pro forma earnings of $0.33 per share. On a sequential basis, the decline is primarily related to lower real estate sales, which are expected to more than offset the anticipated improvement in Performance Fibers.

We also expect a $0.02-per-share first quarter impact from expensing stock options. Our full-year estimate is $0.04 a share from options but accounting rules require immediate expensing of options granted to retirement-eligible employees resulting in a disproportionate impact in the first quarter.

Despite the lower first quarter, we still expect the full year to be somewhat above our 2005 pro forma EPS of $1.57 per share driven primarily by improved real estate and Performance Fibers' results.

Before I close, I'd like to share a few key statistics that are relevant to some of you in maintaining your forecast in all of Rayonier, especially given the structural changes resulting from the sales of MDF and the New Zealand timber assets and also of interest to some of you that pay tax or pass on tax attributes to your investors. First, for 2006, we expect depletion, depreciation, and amortization and the noncash cost basis of land sold to approximate $145 million, which would be about a $15 million decline over 2005 actions. Capital expenditures, excluding acquisitions, are expected to total about $105 million, above our typical $90 million to $95 million target level. This reflects the Performance Fibers' project to significantly reduce our oil consumption that Lee referenced earlier.

With respect to our investment in New Zealand, we expect our 2006 equity income from the joint venture to total approximately $3 million, although this may be somewhat back-end loaded. However, because of the way the joint venture is structured, we expect to realize cash flow in the $7 million to $9 million range.

One common question asked relates to our expected effective tax rate. As you've seen throughout 2005, the year-to-date rate can vary based on like-kind exchange benefits, foreign exchange movements, and other transactions are realized. We ended this year with an effective tax rate of approximately 14% for discrete items, as is showed on chart 21 in the appendix to the supplemental materials.

For 2006, we are assuming somewhat higher like-kind exchange benefits but expect that foreign tax benefits realized this year will not recur following the restructuring associated with our New Zealand holdings. Therefore, we expect the effective tax rate to be above 2005 in the 15% to 17% range.

Finally, I'd like to note that 1099 dividend information for 2005 is being disseminated to our shareholders as we speak. It reflects an income classification of approximately 79% capital gains, zero percent ordinary income, and 21% return on capital. However, please note that this percentage can vary substantially year to year. Nevertheless, the weighted combined tax rate to individuals should still be very favorable compared to typical REITs. This information has been posted to our website and the NAREIT website joining other REITs' similar disclosures.

With that, I'd like to close the formal part of the presentation and turn the teleconference -- turn it back to Lee here.

Thanks, Hans. Let me just conclude my personal comments -- or my comment here on a personal note, and then we'll go back to the operator for questions. Next month I will be celebrating my 62nd birthday, as some of you may be aware. I've been with this company for 38 of those years. Some of you may think that's too long, and over that time I've accumulated a significant number of Rayonier shares, largely through exercising options and holding the underlying shares. At this stage of my career, and rather than continuing to increase my ownership, I believe it's prudent to begin to diversify a portion of my holdings and wanted to alert you to the fact that over the next six to 12 months, you will be seeing some regular stock option exercises and sales of the underlying shares by me. I intended to make these sales pursuant to the written 10B-1 plan, which I expect to enter into in the next few weeks. I want to assure you that these sales are driven by what I hope is astute financial planning and not a lack of my confidence in the future of this company nor is it a subtle indication of my imminent retirement. With that, why don't we turn it back over to the conference operator, okay?

Thank you, sir. Today's question-and-answer will be conducted electronically. [OPERATOR INSTRUCTIONS]

Chip Dillon with Citigroup.

Hi, and, actually, speaking of personal notes -- Gerry, is this one of your last calls?

Chip, yes, it is. Effective January 31, as pre-announced long ago, I will be retiring from the company and continue to remain a -- Rayonier stock will remain a portion of my investment.

Gotcha, well, good luck, and I hope your handicap goes down.

Thank you.

A question on the real estate -- you mentioned that you would have on the DD&A and the noncash part of the timberland sales would go down, I think, $15 million, which I guess means 160 down to 145. So that, to me, means you probably have some range of what you think your real estate activity might be, and I know for the full year you went from 75 to 64. Based on what you're looking at, can you give us some range as to what you think that number could be? Are you looking at it being up? Like, could it be 100 million? Would it be more like 80 to 90? Can you just give us some ballpark?

Chip, let me ask Hans to clarify something. I believe a lot of the DD&A reduction has to do with the reclassification of New Zealand.

That's absolutely right. The MDF facility was generating about $7.5 million a year of DD&A, and the New Zealand timberlands completion was also running around $6 million to $7 million a year. So that's the reason for the decline year-over-year.

But can trick [ph] that out for part of '05 as well, is that right?

Yes, basically a quarter came out for '05, that's right.

Of the timberland sale, but New Zealand was out -- I mean -- sorry -- the MDF was out for the whole year, right?

Yes, and this stops it.

Okay, so maybe the way to think about it is apples-to-apples it's coming down about 22.5, and therefore it's really going up about 7 -- did I do that right?

When you say going up about 7 --

Yes, in other words, the New Zealand timberland, you said, was about 30, right, 7.5 per quarter? And so if it was out for three quarters of the time, then that's about 22.5. So if the reduction is 15, then, you know, basically you're going down 22 and then going back up 7, so you're kind of telling us that your real estate sales might be up about $7 million in terms of the basis of that real estate.

I wouldn't extrapolate that. We have other changes in DD&A coming from the Performance Fibers business as well. So you can't attribute all that movement just to a change in the real estate activity.

I understand, but am I right -- that the net change year-over-year on your cash flow statement is about 22 million from New Zealand, or am I missing that?

2006 to 2005?

Yes.

The first three quarters of the year from New Zealand, Hans is looking at that right now, so we'll get back to you on that point, Chip.

And then, more specifically, do you have -- even if it's a massive range of what you think your real estate would be, sort of upper end and a lower end that you would expect it to be based on your visibility?

In sales value?

Or just the operating -- either sales value or operating income.

We expect -- well, we obviously expect real estate sales to be stronger year-over-year. I'm no sure we want to pin it down to a level at this point but, yes, we clearly expect activity, both sales and operating income, to be stronger.

And directionally, as Lee indicated, on a longer-term basis, an increasing per-acre value, especially in the development category.

Okay, and then looking at Performance Fibers, I know there was a sequential decline that you attribute to costs, and I know there are price initiatives out there for the first and second quarter -- do you see getting back to double digits, not in the first quarter but in the second quarter in terms of operating income? Is that probably fair? In other words, you might improve in the first but probably not get back to double digits?

Well, it's getting pretty close, Chip, so I wouldn't count it out but, on the other hand, I wouldn't guarantee it.

And then, I'm not sure I saw this in the slide, but where is the -- what is the impact in '06 versus '05 of expensing options? How much is that per quarter?

Well, we're looking at about $0.02 for the first quarter, about $0.04 for the full year.

Frank Dunau with Adage Capital.

All right, I've got a few. And, Lee, at 62 and working as long as you've worked there, you can sell as many shares as you want. I just want to know how many that filing is going to have in it.

Frank, this is Gerry Pollack. Lee had to leave at this point, but when the announcement comes out, you'll know.

Okay, and just to follow-up on Chip's question -- if the option expense is $0.02 for the first quarter and $0.04 for the year?

Yes.

I'm a simple person, how comes it's not averaged over the year, or what happens there?

Under the new accounting rules we have to immediately expense options that are granted to retirement-eligible employees. And so that's had the front-end load with the 2006 grants that just occurred here in January.

So if Gerry wasn't retiring, would it be less?

[laughter]

It's retirement eligible, which we have a number of people here, such as Lee, who fit that category.

Okay, and I'm just trying to figure out if DD&A is down, I think, 15 million for the year --

Right.

Chip got me all confused, but I think that was right.

Right.

And earnings is up somewhat, and I think capex is up a bit.

Yes.

Does that mean that cash available for distribution in 2006 is less than 2005?

At this point, we think we'll be roughly comparable.

Christopher Chun with Deutschebank.

Hello, thanks. In terms of development land, the 15,000 an acre or so that you got, was a big number and much higher than in recent quarters. Can you comment on where that land was located or other factors that might have played into that number?

Christopher, hello. Lee stepped out. Charlie Margiotta, president of TerraPointe is here in the conference room, and he'll give you some guidance as to where that occurred.

Thanks, Gerry. It was just somewhat of an unusual quarter in that we had some commercial sales in -- one, in particular in Nassau County, right along A1A, not large acres but at a very, very high price per acre, and then we had an unusually high-value residential sale outside of Savannah of several hundred acres in the $20,000-an-acre-plus range. So it skewed the per-acre price well up. Obviously, if we had more acres, it probably would have averaged down some. So just an unusual quarter with weighted, to some extent, with commercial sales.

Okay, so was this land actually specifically zoned for commercial sales?

Yes, the property in Nassau County along A1A had been zoned many years ago for commercial.

Oh, okay, and was the Georgia land also entitled for development?

No, I don't think it was entitled.

Okay. And then moving on to your rural acreage, it seems like that dropped off quite a bit this quarter. Do you have segregated, in your minds, just how much higher-value rural acreage is out there?

It's very opportunistic. I just couldn't put a number on it. I think the amount of acres, say, year-to-year will be reasonably consistent, although maybe down a little, but -- and prices seem to continue to climb. But I think the rural program, overall, will stay pretty consistent year-to-year, but I really can't put a number on the amount of acres we think we can sell it at the kind of premiums we're getting.

Fair enough. And then in terms of your overall just regular timber harvest profile, can you talk about what that looks like on a long-term basis?

This is Tim Brannon -- it's certainly reasonably consistent with how we've been running our projection in the Southeast and in the Northwest, reasonably consistent year-over-year, so I don't see any unusual patterns, if you will, coming in the future. I guess the one issue, of course, is as we move property into TerraPointe, or as property is sold off on an opportunistic basis, certainly that property gets moving out. On the other hand, we are looking for opportunities to acquire timberland as well. So hoping that will continue to balance out, over time.

Right, right. I was thinking more in terms of what the harvest profile would look like on an ongoing basis on the land that you already have and are not --

Yes, on the land that we have, basically, continue to be reasonably consistent in the relatively near term.

Okay, that's fine. And, finally, in the Performance Fibers business, I was just thinking about what margins might look like next year. And I think Lee said that cellulose specialties, there's a 7% price increase going on?

Christopher, this is Gerry Pollack. Yes, he mentioned there is a 7% increase primarily -- or attributable a lot to the acetate and cellulose specialty grades, and then he indicated that there is a surcharge that we've implemented on top of that that could range in the 3% range. So those are the combinations to lead us to believe, at least on the top line, increase at Performance Fibers and a slow decrease in the higher cost that we've been incurring over the 2006 period.

How much visibility do you have in terms of what your costs are going to look like in '06 relative to '05?

I think that varies. A lot of times you'll see, depending upon the weather patterns in the Southeast, in particular, we can see swings, at this point, we think energy costs next year will be lower than this year, but you never know what political events might occur that will change that. But, as Lee indicated, we are implementing capital projects in Performance Fibers so that by the end of the year, in early 2007, we will have taken a big chunk out of our oil requirements in that business segment. But over a period of nine months, you can see swings in costs based on other external factors.

Right, and if energy prices stay where they are today, can you talk about how much you're looking to save with these with these capital projects on an annual basis?

Well, I think Lee indicated that, once implemented, the projects will save about 200,000 barrels, which he indicated was about 25% of Performance Fibers' requirements. So 200,000 barrels or whatever price you want to put on a barrel, there's a lot of savings. Of course, they're replaced a little bit with the additional fossil fuel burning that takes place, but substantial savings by early 2007, Hans?

Yes, it would be -- the 200,000 barrels would equate to current prices, let's say, roughly, a $9 million to $10 million annual rate.

Steve Chercover with D. A. Davidson.

Thanks, good afternoon. I had a couple of questions on cellulose specialties. First of all, I guess Lee's comments made it pretty clear that this is a core business for you. But philosophically, if you could get a good value for it and swap it into timberlands, would you do so?

I'm a philosopher, too, Steve, and the answer has to be yes. At a good price and ability to replace those strong cash flow coming from that business, the answer has to be yes.

Okay, and, secondly, just a peripheral question -- there's a mill coming back onstream in Eastern Canada that's going to be converted to rayon cellulose. Is that a concern to you at all?

Steve, I haven't heard much about that. A lot of people love to get into the cellulose business. First, rayon cellulose is not a core product line for us. High-tenacity rayon is but not the typical textile rayon. So we don't hear much about that. A lot of people profess to get into the business. As you know, it takes a long time to get the expertise, but I wouldn't say that Canadian mill is a strong threat to us at this point in time.

[OPERATOR INSTRUCTIONS]

Mark Weintraub with Buckingham Research.

Thank you. It used to be that your long-term guidance was -- on average, you'd sell 2% to 4% of your land base. Do you have an updated number for us at this point, or how should we think about strategically -- your considering of the land base and your sales programs?

Well, I would probably say that that guidance doesn't fit as well as it used to, given our direction to move more into the development area, the entitlement area, and get a greater value per acre than we did in the past. At this point, I don't think we have any particular guidance in terms of aggregate earning that we talked about. We indicated it's going to take us a year or two to move into that higher-value trend. Hans mentioned that we actually withdrew some unentitled property this year to position ourselves for the future. So I think we're probably still -- I'm going to ask Charlie -- we're probably still 12 to 18 months out before we see more of a pattern. So I'm not sure that full 2% to 4% is a whole, but, Charlie do you have any update at this point?

I totally agree with you, Gerry. If you look at '05 rough numbers, we saw well less than 2%. We don't -- to be honest, exactly what Gerry said -- we don't really think about it as a percent of ownership anymore. We think more about value creation both on short and long-term basis. So I think we've just moved away from the 2% to 4% and look at our strategy and where we can create the most value. I just don't think the 2 to 4 -- I think it fit for a while, because it generated a lot of energy here in the company to move forward and be more aggressive in the program, but now we do think of the program somewhat differently.

It certainly makes sense. Maybe just following up on that -- one of the parts of value creation is going to be, I assume, entitling land. Is that something, first of all, that on an ongoing basis you will give us updates on where you are in various entitlement processes and have you, in the last three, six months, been able to entitle any properties?

First of all, just generically, entitlement generally takes one to even three years, depending on where you are, say, a good one to two years. So we haven't entitled anything in the last six months.

Second, one of our strategies is to enter into agreements with developers who will participate in a revenue stream, and they'll take it through the entitlement process. So we may entitle some ourselves, or we may enter into an agreement where a developer entitles it, let's say, on our mutual behalf. We'll be as transparent with the program as we can.

At this time, we have no more questions in queue. I'd like to turn the conference back to the company for concluding remarks.

All right, thanks very much. This is Hans Vanden Noort. I'd like to thank everybody for joining us. Please contact Parag Bhansali with any follow-up questions. Thanks again.

Ladies and gentlemen, this concludes today's conference call. We thank you for your participation, and you may disconnect your phone lines at this time.